India’s Pantaloon Retail taps economies of scale

Nation’s top retailer to focus on creating own brands in food business

By

V.Phani Kumar

MUMBAI (MarketWatch) — With more than 1,000 stores and 16 million square feet of operational space, Pantaloon Retail India Ltd. is now close to a point where it reaps the benefits of economies of scale, its founder and managing director Kishore Biyani says.

But for India’s largest listed retailer, the 14-year journey into the world of modern retailing won’t be slowing anytime soon.

Pantaloon Retail India founder and managing director Kishore Biyani

Biyani says the company will increasingly assert itself as a play on consumption in modern India, rather than a pure-play retailer, and attempt to make and create brands that are then sold at its stores.

In four years’ time, the company also aims to increase the size of the operational retail space to between 25 million and 30 million square feet, with annual revenues forecast to grow in the 30%-35% range in the interim, he said.

“I think retail is [increasingly] all about the scale, and as the scale of the business grows, the cost definitely comes down,” Biyani said in a recent interview with MarketWatch. “We are very well placed in terms of our cost structures. … We are eliminating all the excess costs that are there in the system and becoming very, very competitive.”

“We are a whole consumption cosmos. … Retailing is a piece of that cosmos.”
Kishore Biyani

The retailing business the world over is known to be one with low margins, with profitability often determined by how efficiently a company manages its supply chain, and on the scale of its transaction volumes.

Retailing in India

Organized retailing in India is still in its nascent stages of growth, with the country largely buying groceries and food items from the millions of small, independent mom-and-pop stores in the unorganized sector.

Government restrictions on foreign direct investment have so far not only shielded the local industry, but have also deprived it of the investments required, noticeably in areas such as warehousing and cold-storage facilities.

The country’s total retail sales were 11.49 trillion rupees ($258 billion) in the year ended March 31, 2010, according to ratings agency Care India’s estimates.

Currently, foreign retailers can own up to 51% in ventures that sell single-brand products, such as Nike sportswear. However, those who stock and sell multiple brands, such as Wal-Mart Stores Inc.
WMT, -0.75%
and Target Corp.
TGT, -0.76%
, are barred from selling directly to consumers, although they can open cash-and-carry businesses that sell to wholesalers and other small businesses and shopkeepers.

But that may be about to change, with the government widely expected to relax some of those restrictions, potentially throwing up new challenges and opportunities for incumbents such as Pantaloon.

Having started as a trouser manufacturer in 1987, Pantaloon (523574) was incorporated under its current name 10 years later, when it also opened its first eponymously branded store in the eastern Indian metropolis of Kolkata, with an initial investment of 3 million rupees.

Four years later, the company opened three ‘Big Bazaar’ hypermarkets, setting in motion its transformation into a retailer straddling multiple product lines and store formats, which fall into the three broad categories of food, fashion and home.

As the largest listed retailer in the country, Pantaloon competes mainly with other Indian businesses owned by large, well-established conglomerates, including those from the sprawling Reliance, Tata and Aditya Birla groups, and one controlled by K. Raheja Corp., a large hospitality and real-estate group.

The 49-year-old Biyani is himself the product of a middle-class family of traders, and he has pushed aggressively over the past several years to grow Pantaloon to its current size.

Retail ecosystem

However, the company’s expansion wasn’t confined to opening new stores and stocking them up with more products. Lack of adequate infrastructure meant Pantaloon had to create a whole ecosystem, Biyani said.

For Pantaloon, pursuit of that ecosystem meant establishing a logistics firm to help it procure and distribute products as it needed, enabling credit to consumers seeking to buy big-ticket items such as electronics and furniture, and even developing malls to house its stores. It also involved creation of the company’s own branded products, such as cereals, to expand the range of goods stocked on the shelves and offer them at a price that generates mass appeal.

“The whole problem in India is that there is nothing there, so it’s all about creating it yourself. … Worldwide, retailers’ job is only to get the product to the shelves and then sell it to the consumers, because the consumers are ready before that. But we have to do every job in this country,” including introducing consumers to products not yet widely available in the country, he said.

The quest for creating a whole ecosystem around the company’s retail business led Biyani to whole new areas, which are developing alongside retail.

“We are a whole consumption cosmos. … Retailing is a piece of that cosmos,” he said. “The idea is to manage the entire cosmos of these businesses, right from procurement and sourcing to owning brands and distribution to the consumers. … Once we acquire the customers, we sell them whatever they want.”

Pantaloon today is the core business of the Future Group — also founded and controlled by Biyani — which has business interests in insurance, venture financing, consumer finance, leisure and entertainment and retail real-estate development.

Cost of expansion

When asked about how the company manages financial resources for its aggressive push, Biyani said the company has its “own style of doing business,” and that investment resources are broken down and allocated to different companies within the group.

But customer preferences and demand will decide the order in which those resources are apportioned, he said.

“Sometimes we are accused of doing too much. Sometimes we are accused of raising debt. I think market goes through its own cycle. [At different times], it’s looking at our company with different lenses,” he said.

However, “Our job is to look at the business, look at the consumer,” and expand accordingly, he said.

In the nine months ended March 31, 2011, Pantaloon reported group net income of 401.5 million rupees, less than 1/10th of the company’s interest expenses of 4.35 billion rupees. Group sales totaled 88.35 billion rupees.

Analysts at Enam Securities noted in a recent report that gross borrowings of 44 billion rupees as of March 31 implied a debt-to-equity ratio of 1.4 for the company and was a “fundamental headwind.”

However, the brokerage retained its outperformer rating on the Pantaloon stock, saying the likelihood that the government would allow FDI in multi-brand retailing was a plus for Pantaloon.

Pantaloon could be “amongst the biggest beneficiaries” as a strategic investor could “dramatically” improve its balance sheet, as well as its rate of expansion and supply-chain efficiencies, it added.

Biyani said a lot of people have “not understood” the company’s balance sheet, and that the debt on the company’s books represented investments to improve efficiencies and in various assets, which include two textile mills in Mumbai.

“If I sell all those investments, I’ll become a debt-free company,” he said.

Several Indian media reports have recently highlighted that Pantaloon is open to selling stakes in some of its non-retail businesses to raise funds and repay a portion of the company’s debt.

Biyani also said the company isn’t afraid to close down those parts of business that don’t work, and that validating the success of his retail stores isn’t difficult.

“In this marketplace, you are naked in front of everyone. … In the retail and the restaurant business, you can’t hide behind anyone,” he said, adding that the strong response from customers is encouraging the company to expand.

The next step

Referring to the current economic environment and rising interest rates, Biyani said sales in electronics and furniture were experiencing a softness in demand, but food and other segments hadn’t been touched.

“Interest rate doesn’t help you to bring down demand, because India is not a credit-led society. Demand happens because we have a high savings rate in any case,” he said, adding that private spending was up because rising prices for India’s most popular stores of wealth — gold and property — made consumers “feel rich.”

Looking ahead, Pantaloon’s focus is on creating its own brands, especially in the fast-moving food-items section, while expanding private labels in the fashion segment.

“People think only multinationals can do it. We are going to make an attempt … to do this better,” Biyani said, adding that Pantaloon aims to rank among India’s biggest food and consumer-product companies.

Pantaloon already has its own brands of cereals, noodles, soaps and toothpaste today, and wants to expand the range of such products. Currently, the company’s own brands bring in about 5 billion rupees in annual revenue, which the company aims to grow to 15 billion rupees in three years, Biyani said.

“The taste palate of Indians, we understand them much better than anybody else. We’d love to [channel] all our experience and understanding of India’s communities to create products and brands which will be loved by Indians,” he said.

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